Is Bulgaria ready for the Euro?

Bulgaria, the poorest member state of the European Union, approved its draft budget plans for fiscal year 2019 last Sunday. The draft notably seeks to increase public servants’ wages, including in the judicial system, and raise government revenue by 12 percent amid economic growth of 3.6 percent next year. These measures are no doubt meant to instil confidence in Brussels and international investors that Sofia is on track to join the Eurozone, for which the country hopes to enter the mandatory “waiting room” in 2019. But Bulgaria’s attempts to present itself as a model student notwithstanding, Sofia still has work to do to convince Brussels that it is fit for the euro.

In fact, European Central Bank (ECB) officials openly demonstrated their scepticism this October when they imposed additional requirements regarding inflation control as Sofia tries to plug the country’s stark wealth gap. The fresh swath of measures came as a blow to Bulgaria, because the ECB’s move called into question the country’s ability to fulfil the criteria to join the euro. In October, the inflation rate in Bulgaria reached 2.7 percent, way above the harmonized inflation of 1.5 percent set by the ECB.

The latest wave of doubt will thus significantly diminish Sofia’s prospects of acceding to the coveted Eurozone in the near future. Bulgaria had already agreed to let its banking system undergo ECB-designed stress tests before being admitted to the Eurozone’s ERM II system, the famous waiting room which prepares member states to join the euro by limiting exchange rate fluctuations. Sofia had hoped to join ERM II, as well as the Banking Union, by July next year. That timeline has now been seriously thrown into doubt by the ECB’s newest stipulations, which go well beyond the conditions defined by the Treaty of Lisbon.

Aside from these new concerns over inflation, Bulgaria was extremely proud to have met the Maastricht criteria for adopting the euro. Its currency, the lev, has been pegged to the euro since its launch almost two decades ago, and its public finances are in good shape. Prospective euro club members, however, must do more than nominally meet financial conditions. Particularly given current structural issues burdening Europe, EU officials are extremely wary of adding another country to the eurozone which would put additional pressure on the common currency.

As many countries in the bloc have clarified on several occasions, being a responsible member of the eurozone also requires leading a concentrated fight against corruption, an area where the Black Sea state is struggling. In 2017, the European Commission echoed such concerns, lamenting in a progress report on the Cooperation and Verification Mechanism – established to fight corruption and crime in Bulgaria – that Sofia’s policies have heretofore been lackluster and ineffective.

In fact, Bulgaria also holds the unenviable title of the EU’s most corrupt member: every year, somewhere between 14 and 22 percent of Bulgaria’s GDP is lost through graft. This double-dealing has not just preventedBulgaria from reaching its economic potential, but has caused the country to develop an unfortunate reputation for discriminating against foreign companies, especially in the energy sector.

Energy distributors have in recent years faced extensive problems with Bulgaria’s regulatory environment. The most recent headline-gripping example came in July when the Commission for Protection of Competition (CPC) yet again accused the country’s three electricity distribution companies – Austrian EVN, Czech CEZ and Energo-Pro – of using their market positions to restrict the free trading of energy.

To escape its troubles with the regulator, CEZ attempted to sell its assets to Inercom, a small Bulgarian company alleged to have ties to energy minister Temenuzhka Petkova. In response to accusations that she would profit personally from the sale, Petkova offered to resign from her post, a request that was declined by the PM.

Although the CPC blocked Inercom from taking over CEZ’s assets—albeit on slightly dubious grounds—CEZ’s struggles to exit the Bulgarian market and the disadvantageous environment this creates was not lost on foreign investors. Indeed, foreign investors tend to be the first to leave a country when rule of law is not respected, as it indicates that their investments are not secure. Consequently, FDI has almost halved from €1.2 billion in 2015 to a paltry €682.8 million last year. In the first half of 2018, this figure stood at €246 million, just 0.5 percent of Bulgaria’s GDP.

In that light, Sofia’s haste in agreeing to the ECB’s new requirements can be seen as an attempt to alleviate the fears of foreign firms who might be interested in investing in Bulgaria. After all, despite a paltry ten percent corporate tax, the “costs” of dealing with government in the form of controls, bribes and permits is keeping much needed foreign capital at bay. This corruption is on such a grand scale that Radosvet Radev, the president of the Bulgarian Industrial Association, warned that remittances from Bulgarians abroad now exceed FDI inflows.

The issue of corruption is also exacerbating wealth inequality, which FDI could help even out. Bulgaria’s wealthiest earn more than eight times what their counterparts on the bottom rung bring home. At €575 a month, Bulgaria has the lowest average salary in the EU. Worse, these brutally low incomes are devoured by food prices that are on par with the rest of Europe, meaning that Bulgaria has yet to develop a substantial middle-class carrying economic progress forward.

If these metrics are anything to go by, it is clear that accession to the eurozone is not a privilege to be granted simply by achieving fiscal stability. As the currency union prepares for significant challenges like an unprecedented budget showdown with Italy, the last thing it wants is a new member with less than impeccable credentials.